'Increased Working Capital Burden for Construction Companies'... Hyundai Construction Also Manages Liquidity with Corporate Purchase Cards

Hyundai Construction has started managing liquidity by utilizing a corporate purchase-only card. This move comes as the burden of working capital has increased significantly due to a sharp rise in unbilled construction work and construction receivables despite ongoing projects. As the construction-related funding market has generally contracted amid real estate project financing (PF) crises, top-tier construction companies are also using corporate purchase cards as a means of securing funds.

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According to the investment banking (IB) industry on the 13th, Hyundai Construction signed a one-year purchase-only card agreement worth 62 billion KRW with its affiliated card company, Hyundai Card. As a result, Hyundai Construction will not have to directly pay for purchases of raw materials and goods within the credit limit for the next year. Although the card payment deadline is one year, it can be extended further. Hyundai Construction has thus entered cash liquidity management by postponing payment for purchase funds.

Hyundai Card issued asset-backed securities using Hyundai Construction’s accounts receivable as the underlying asset (a type of collateral) to secure funds for settling Hyundai Construction’s purchase liabilities. When Hyundai Construction repays the debt on the card payment date, the funds are used to repay the principal and interest of the asset-backed securities. Hi Investment & Securities, a securities firm affiliated with the broader Hyundai group, acted as the lead manager for the issuance of the asset-backed securities.

Hyundai Construction is a top-ranked domestic construction company that continues to increase orders and improve performance despite the downturn in the real estate market. Last year, its consolidated sales reached 29.65 trillion KRW, up more than 7 trillion KRW from 21.24 trillion KRW in 2022. Operating profit also rose from 575 billion KRW to 785 billion KRW during the same period. Its order backlog exceeded 63 trillion KRW, differing from other construction companies facing a shortage of work.

However, the burden of working capital is increasing due to the rise in unbilled construction work and construction receivables. At the end of last year, Hyundai Construction’s unbilled construction work stood at 5.3352 trillion KRW, up 1.6 trillion KRW from 3.7347 trillion KRW in 2022. Construction receivables increased by 67%, from 1.9854 trillion KRW to 3.3232 trillion KRW. Unbilled construction work and receivables occurred not only at domestic housing projects such as Seoul’s Dunchon Jugong and Gaepo Jugong 1st Complex (The H Firstier I-Park) but also at major overseas projects including Saudi Mazan Oil & Gas Field and Panama Metro.

Hyundai Engineering & Construction_DH Yeouido First Bird's-eye View Rendering

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The scale of PF contingent liabilities has shown a continuous increase over the past three years. As of the end of September last year, Hyundai Construction held contingent liabilities worth 5.2 trillion KRW on a separate basis. The contingent liabilities grew as it secured large-scale projects such as the CJ CheilJedang site in Gayang-dong, Emart site in Gayang-dong, Hilton Hotel site, LG Electronics site in Gasan-dong, and Le Meridien Hotel site.

The burden of equity investment in affiliated project companies due to construction orders is also ongoing. Recently, Hyundai Construction carried out a paid-in capital increase of 62 billion KRW for an affiliate involved in the construction of the metropolitan area express railroad (GTX-C). It invested 1 billion KRW in the first round in April, receiving 190,706 shares, and plans to inject 61.2 billion KRW in June to acquire 12,243,246 shares.

An IB industry official evaluated, "Hyundai Construction holds more than 2 trillion KRW in cash equivalents and, as a Hyundai Motor Group-affiliated construction company, has the highest credit rating (AA-) among construction firms, so there should be no major issues in raising funds." The official added, "However, as sales increase, the burden of working capital has grown, increasing the incentive to secure funds," and "Recently, construction companies such as Hyundai Construction and Lotte Construction have been actively using corporate purchase cards as a liquidity management measure."

A Hyundai Construction representative said, “The expansion of unbilled construction work and receivables naturally occurs as major large-scale domestic and overseas sites proceed with their projects,” and added, “Liquidity management through card companies is a method that construction companies have continuously used and is unrelated to liquidity problems.”

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